How Covid lockdowns will impact Australia’s economy in 2022


The end of lockdowns are set to trigger financial pain across Australia, but there’s one state that will be impacted the most.

After Australia’s last Covid shutdown, the economy enjoyed a stellar rebound. Sadly, there are reasons to think we will have no such luck in 2022.

Southeastern Australia will be reopening and that’s a huge gain. Especially for the services industries like tourism and recreation that have been levelled by lockdowns. But a series of shocks is also coming that is likely to take the shine off the broader economy in a big way.

Terms of trade collapse

The first is that the terms of trade – the ratio between a country’s export prices and its import prices – looks set to collapse over 2022.

It is already underway in iron ore. Next are the two coals and liquefied natural gas (LNG). These are enjoying a huge boom right now as another round of Covid distortions detonates another market. But this is very short-term and prices could crash through the first half of 2022 as markets adjust.

This would open a giant income sinkhole under the economy all of next year that would trounce nominal growth.

This brings us to the other shocks. The last time we went through a terms of trade adjustment was in 2012-15. It would have been much tougher except for two policy measures.

Fiscal authorities allowed the budget deficit to blow out and so absorbed some of the income shock.

Monetary authorities slashed interest rates to support household income and boost house prices. This was the key manoeuvre to offset crashing growth in WA and Queensland with consumption booms in the southern financialised states.

Yet both of these are likely to be constrained this time around.

What this means for house prices

Fiscally, we are pulling in our horns already, with much more to come as the huge deficit becomes a political hot potato. Many of the crisis programs, most crucially for housing construction, will role off with a big demand hole on the other side of them.

In monetary terms, tightening is imminent for mortgages to take the steam out of the property market. Whatever form it ultimately takes, the aim of this tightening will be to reduce the availability of mortgage credit, which will dramatically slow house prices, especially in the absence of mass immigration which will remain subdued by Covid.

House prices shouldn’t fall (except in WA) but the easy gains will be over.

House prices gains are likely slow materially. Whether they fall will hang on the state of the labour market. Terms of trade crashes tend to hit wages rather than jobs so price stagnation is the better bet. Except, perhaps, in Perth where the falling commodity prices will hit hardest and cost jobs, triggering house price falls.

In short, unlike 2015, house prices and fiscal spending are going to slow directly into the commodity income shock.

Economists call this pro-cyclical tightening. Policymakers try to avoid it because it leads to greater swings and volatility in economic growth. However, this time, owing to our measures to address Covid, it is going to happen.

Will it be an actual recession? Unlikely. What is more certain is that it will feel like one. Crashing nominal growth and national income are actually worse than falling GDP for most people’s standards of living.

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geopolitics and economics portal. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review. MB Fund is underweight Australian iron ore miners.

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